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After your car was hit by a truck, you have been offered a settlement. In the...

After your car was hit by a truck, you have been offered a settlement. In the settlement, you would receive $30,000/year starting in 1 year for 15 years, then $10,000/year for 15 years starting in year 16. If your discount rate is 7%, what is the present value of this settlement to the nearest dollar?

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Answer #1

We will use the following formula to calculate the present value of the payments :

For part 1 of payments :

C = $30,000

i = 7%

n = 15 years

PV = $30,000 * [(1-(1+7%)^-15) / 7%)

PV = 30,000 * 9.11 = $273,237.42 (A)

For the second part, the present value of the payments would be

PV = $10,000 * 9.11 = $91,079.14

This value will be further discounted for 15 years.

PV = $91,079.14 / (1+7%)^15 = $33,011.27 (B)

Total present value = A + B = $273,237.42 + $33,011.27 = $306,248.69

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